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Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management.
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It's 7 o'clock in the morning, London time on Wednesday 11th March.
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It is not entirely clear what the U.S. Administration's current communication strategy is, but the
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consequence has been to create volatility in financial markets. Investors do not necessarily
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like volatility unless they are short-term speculators who are able to profit from special
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insights, of course. The social media post from current U.S. defense secretary Hesketh
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that a tanker had been escorted by the U.S. Navy through the Strait of Ormos was taken
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down and subsequently denied, but not before the oil market had reacted.
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U.S. President Trump posted a warning to Iran not to mind the Strait of Ormos, but the
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nature of the warning could be interpreted as revealing the limited options the U.S. has
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to respond. The U.S. has claimed it has destroyed some mind-laying vessels. If the Strait
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is mind, it raises the risk that oil prices will stay higher for longer.
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The Wall Street Journal reports that the International Energy Agency has proposed the largest
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ever release of strategic oil reserves, which has allowed crude oil prices to fall back.
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So this is obviously a countermeasure that can only be used a limited number of times.
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Investors are likely to continue to focus on two issues. One, when the U.S. withdraws
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and two, how long Iran continues its attacks on shipping and neighboring oil infrastructure
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after the U.S. withdraws. The release of U.S. February consumer
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price inflation is, of course, immune from the effects of the war, but it still matters
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a great deal for financial markets. The Federal Reserve should not respond to oil price
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shocks. There are still enough economists at the Fed to know that this is a one-off
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relative price move over which they have no control. Fed Chair Powell can hardly order
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the FOMC to begin mind-sweeping operations in the Gulf.
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Banks are supposed to react to inflation shocks, not relative price shocks. A broad-based
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increase in prices suggests an imbalance in the economy which monetary policy can tackle.
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A relative price shock suggests an imbalance in a single market, which monetary policy can
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do relatively little about. So whether there are underlying inflation pressures evident
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in the February data matters quite a lot. The expectation is that underlying inflation
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is likely to be subdued still, giving the Fed room to ease later this year. However,
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the affordability crisis in the States is not about the inflation reality, but focuses
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on the price of high-frequency purchases and inflation perceptions. Getting into the
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detail of the inflation report is therefore important in trying to gauge the political
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pressures relevant because this may sway the U.S. administration's war policy. Already
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gasoline prices are approaching a 27% increase from the lows of January, not something that
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will be reflected in the data today, but certainly something that will be being noticed
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by consumers. Grocery prices have risen in a more or less normal manner, but there are
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some high-profile items that have soared in price. Beef prices up 15% since January
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2025, coffee up over 18% are in the same period. Those are the prices that stick in consumers
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minds, and they're what shape inflation perceptions, and that's what matters in judging affordability.
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General and final February consumer price inflation was unchanged from the preliminary
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number exactly in line with the ECB's target of 2% year over year. This is the only German
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data point that is almost never revised. The picture is, of course, benign for European
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inflation, and it means that the European central bank is likely to be content to continue
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with its policy of masterful inactivity. That's all for the day. Have a good day.
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